Insurers who participate in the marketplaces established under the Affordable Care Act (ACA) are required to offer cost-sharing reductions (CSRs) to eligible people. CSRs decrease deductibles and other out-of-pocket expenses like copayments. To qualify for CSRs, people must generally purchase a silver plan through a marketplace and have income between 100 percent and 250 percent of the federal poverty guidelines (also known as the federal poverty level).
Before October 12, 2017, the federal government reimbursed insurers for the costs of CSRs through direct payments. However, on that date, the Administration announced that, without an appropriation for that purpose, it would no longer make such payments to insurers. Because insurers are still required to offer CSRs and to bear their costs even without direct payments from the government, most have covered those costs by increasing premiums for silver plans offered through the marketplaces for the 2018 plan year, and CBO expects all insurers to do so beginning in 2019.
For the spring 2018 baseline, CBO and the staff of the Joint Committee on Taxation (JCT) project that the entitlement for subsidies for CSRs is being funded through higher premiums and larger tax credits based on those premiums instead of through direct payments. The projections reflect the way insurers are currently reimbursed for the costs of providing CSRs to eligible enrollees in light of the Administration’s change in policy. That change took two key considerations into account:
- CBO has long viewed the requirement that the federal government compensate insurers for CSRs as a form of entitlement authority.
- The Balanced Budget and Emergency Deficit Control Act specifies that, in the baseline, funding for entitlement authority should be “assumed to be adequate to make all payments required” by law.
With the federal government no longer reimbursing insurers for the costs of CSRs through direct payments, CBO has continued to treat CSRs as an entitlement and considered two approaches for doing so in its spring 2018 baseline projections:
- Under the first approach, CBO would keep projecting the direct payments for CSRs and project premiums, enrollment, and government subsidies in the marketplaces as if insurers had not raised their premiums to cover the costs of CSRs. Such projections would not match actual 2018 premiums in the marketplaces. Moreover, the approach would lead to projections of subsidies that were too low, resulting in less accurate cost estimates for proposed legislation.
- Alternatively, CBO would align its baseline projections for 2018 to actual premiums in the marketplaces and cease projecting the direct payments for CSRs. Under the second approach, CBO’s projections of premiums, enrollment, and government subsidies in the marketplaces would reflect what is actually happening now—namely, that most insurers have covered the costs of CSRs by increasing premiums for silver plans offered through the marketplaces for the 2018 plan year. Those projections also would reflect CBO’s expectation that, in the absence of direct payments for CSRs, they will be funded through premium tax credits in the future.
After following its normal procedures for consultation with the House and Senate Budget Committees, CBO used the second approach. That approach allows the baseline projections to more accurately reflect what is happening in insurance markets. It also will make cost estimates for legislation more useful to the Congress because the approach reflects the reality that the costs of CSRs are being incorporated into premiums and into payments of premium tax credits.
If legislation was proposed to appropriate funding for CSRs, what would change is the method of paying for the entitlement; the underlying requirement for payment exists regardless of method. On that basis, after consulting with the budget committees about the baseline and about cost estimates relative to that baseline, a cost estimate for such legislation will show no effects on direct spending or revenues. That approach would continue the practice used in past cost estimates for legislation proposing to appropriate funding for CSRs. If such a proposal was enacted, CBO would update its baseline projections to incorporate those appropriations and reflect what was expected to happen under that new law.